Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I welcome the opportunity to contribute on this debate, the importance of which is the reason Fianna Fáil decided to dedicate our Private Members' time to the issues of lending and the establishment of a State-owned, SME-focused new enterprise bank.

The debate's starting point is to acknowledge that we have a real problem. If we do not acknowledge the problem with availability of credit in the economy, we will not solve it. Access to credit is to an economy what fuel is to a car. One cannot have a properly functioning economy unless one has an adequate supply of credit. We can debate this matter all night, but if one speaks with business people who rely on credit from financial institutions, one will be given the consistent message that credit conditions remain extremely difficult. Whenever I speak with a business person, I ask about the main challenges facing him or her. Credit is always in the top three. The other two are generally issues of compliance and red tape and the cost of doing business, for example, local authority rates, energy costs and so forth. Almost without exception, credit and finance are key issues for businesses, particularly in the SME community.

Through various statistics, Deputy Calleary outlined the importance of SMEs to the economy. We all acknowledge that they will be the driver of Ireland's economic recovery. We love to hear of multinationals coming to Ireland and would like to see many more of them, but it is now rare to hear of a multinational coming to Ireland and announcing 700 or 800 new jobs, themselves leading to spin-off jobs. The IDA will need to continue working on that side of the economy, and the best of luck to it, but our onus is to focus on SMEs, particularly in terms of credit.

The Government refers to lending targets. The two pillar banks must meet a target of €4 billion each in 2013. They claim they will do so and, upon examination, the Credit Review Office, CRO, asserts that they are on course to meet their targets, but Deputy Calleary is right. In many ways, it is a phony debate. At least two thirds of the composition of the €4 billion per bank will involve refinancing and rolling over existing credit. There is nothing wrong with refinancing existing credit or rolling over loans, as it remains credit and forms an important part of the economy, but it is not new credit and we should not measure it as such. The CRO's latest report made it clear that, in many respects, the €8 billion target for AIB and Bank of Ireland is a false one, as no one is suggesting the economy needs anything near new lending of €8 billion to the SME sector. In the report, Mr. John Trethowan pointed to the argument that, if new lending of €8 billion per annum were to be achieved, it would require a lending-borrowing rate of approximately twice that of the EU's most successful economy, Germany, on a like-for-like scale basis.

Let us have a real debate. Let us set targets for new lending - not approvals, but the drawing down of new credit. This debate has been kicked around for the past two or three years. The banks are meeting their targets. Some of that is repackaging existing credit, with a small element of new credit. Can we not once and for all agree on the definition of what constitutes a lending target and have the banks independently assessed, perhaps by the CRO, to ensure the targets are being achieved? This would be critical.

Many SMEs are cautious about taking on new debt and many loan offers are not being drawn down. This is for a number of reasons. SMEs got burned by property investments, many of which have contaminated good trading businesses. When approvals are given, often after a long time, they come with such onerous terms and conditions and punitive interest rates that drawing down the credit would not be sustainable for the businesses in question. Many of those approvals come with demands for personal guarantees, which many people are not prepared to give for obvious reasons. They have seen the consequences for those who made personal guarantees in recent years in respect of property investments.

We must accept that there is a distinct lack of competition in Ireland's banking sector. Deputy Calleary referred to a number of the banks that have left Ireland or have signalled they are about to leave, including ACC Bank, which will hand back its banking licence. There have been some positives, for example, the expansion of KBC. Investec, a welcome and relatively new entrant to Ireland in recent years, has indicated it will enter the mortgage market. We badly need competition in that sector.

Ireland must be primed for new entrants to the banking sector. I am referring to entrants with clean balance sheets and that are not burdened by historical tracker mortgages, which are dragging down a number of our domestic banks. These new entrants would not have been burned by Ireland's property experiment. If the banks that operate internationally shared the Government's confidence in the future of the Irish economy, I would expect more of them to want to enter our market and offer personal customers and SMEs products and services. I hope the Government is actively trying to attract to Ireland banks that, importantly, are not burdened by the legacy issues of tracker mortgages and property loans.

I have mentioned the pillar banks' targets. A frustration for many business people relates to the discretion that was historically found in local branches. People used to talk to and build personal relationships with bank managers who knew the businesses in question intimately. Nowadays, a manager does not appear to have any power. Virtually no significant lending decision is made at the branch level. It is passed up to head office where it goes through a risk assessment process. This is a weakness in how the banking system has developed. Power and discretion always existed at local level, where the people involved in making the decisions knew the businesses and the people running them well, had established trust and built relationships.

That seems to have been demolished due to the experience of recent times. It is frustrating for business people who are seeking loans. Comments have been made about why the number of cases going to the Credit Review Office is so low. I would argue it is because business people can only go to the CRO after they have exhausted all the internal channels within a bank. They must first make a formal loan application, which takes time and is onerous. They have to receive a decision on that application and must then exhaust the bank's internal appeal procedures. It is only when their appeal has been refused that they can go to the Credit Review Office. In many instances, however, the request for credit is quite urgent so people in business cannot wait for the process to conclude before taking a case to the CRO. The Government should examine that issue. Surely it should be sufficient that if a bank refuses an application, a person can go directly to the CRO.

I welcome the recent budget increase to €3 million in the threshold limit for loans that can be considered by the CRO. That is an important step and it is to be hoped we will see more work going to the CRO. The Government must ensure Ulster Bank is brought under the remit of the Credit Review Office. At the moment, the CRO's remit covers AIB and Bank of Ireland. People who have commercial loans with Permanent TSB, which experimented in that market, do not have the right to go to the Credit Review Office. That issue needs to be addressed.

The significant reduction in competition in the Irish banking sector has consequences for customers by way of increased fees and charges, reduced interest rates on deposits, and higher rates of interest on loans for personal customers and SMEs. We need to have two fundamental aspects to our approach to banking. The first is regulation, which was deficient in the past and we all acknowledge that. The second and equally important pillar is competition. Much more work must be done by the Government in that respect. Allied to that, the Central Bank must do much more to protect consumers, given its regulatory role. The Central Bank is not there just to supervise the banking system prudentially and ensure the checklist of regulations is being ticked. It is also there to protect consumers, so I want to see the Central Bank being more prominent in that role.

Our motion alluded to moneylending. I acknowledge that licensed moneylenders are operating a legitimate business and are regulated by the Central Bank. A recent report showed a 20% increase in recent years in the number of those availing of moneylenders' services. Some 360,000 people owe approximately €200 million. The study found that about one quarter of them have at one stage got into serous difficulties in repaying those loans. That tells us something about the state of the economy, of which we are all acutely aware. In addition, that so many people have had to turn to moneylenders means that traditional providers of credit in the economy, such as banks and credit unions, have not been able to supply the credit required.

There are without doubt people who should not get any more credit. They would like to draw down loans they can never afford to repay based on their income. Banks must be prudent and protect the capital that taxpayers have given to them, but there is undoubtedly an issue concerning the contraction of lending.

Above all else, we want to see a new enterprise bank which is focused on SMEs. The Minister's amendment acknowledges that the Government promised a strategic investment bank to provide finance for large capital projects, a conduit for venture capital and a lender to SMEs. As a precursor to that, the Minister has established the strategic investment fund, although we have yet to see the legislation to provide for a reorientation of the National Pensions Reserve Fund to channel some money towards the strategic investment fund.

A greater priority for the economy is the issue of SME lending. If we can agree on one thing, it should be that the engine of recovery will be SMEs. They are certainly starved of cash and many of them find it exceptionally difficult to obtain credit. That issue will have to be addressed. The banks seem to have swung from one extreme to the other. Seven or eight years ago, they were throwing money at people, as it were, and seemed to have no concept of risk assessment. They took substantial risks in putting all their eggs into the property basket and we have all witnessed the outcome for the banking system and the country.

Banks appear to have gone to the other extreme now, being risk averse and unwilling to take any chance in respect of trading businesses. This even includes businesses with which the banks have built up a strong relationship over the years. Banks have been consistently restricting overdrafts in recent times. I acknowledge that the troika programme contains strict targets for banks to meet in terms of repairing their balance sheets, rebuilding their loan-to-deposit ratios, and de-leveraging non-core assets. All that has percolated its way down to individual SME customers. It has meant that banks are less inclined to give out more credit or have been aggressively targeting deposits in an effort to rebuild those ratios. That is what the banks are doing and there seems to be no reward or incentive for them to give out new credit.

If the Minister does not believe what we are saying, he should listen to those at the coalface. Deputy Calleary referred to ISME's recent quarterly report on lending which reads:

Despite assertions from the banking PR machine, access to credit is abysmal. The application process is getting more tortuous while zealous bankers terrorise owners of small and medium businesses with legal letters of foreclosure, rather than negotiate an economic settlement.

One can accuse Mr. Mark Fielding, the CEO of ISME, of exaggeration but he is representing thousands of business people. I have heard none of them contradict what he has consistently said about credit. I know the Minister will not accept our motion but I hope he will accept the need for a new SME-focused enterprise bank. The Government should start doing some detailed work on that issue to see how it can be established and what the mechanics are. The Government should accept that such a bank could play an important role in the recovery of the economy.

See this speech in context